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Tokyo - The Bank of Japan announced on Tuesday it’s most
determined effort yet to end years of economic stagnation, saying it would
switch to an open-ended commitment to buying assets next year and doubling its
inflation target to 2%.

It promised to reach the inflation goal "at the
earliest possible time."

The steps mark a break with an earlier policy of topping up
a lending and asset buying programme launched in October 2010m and follow weeks
of relentless pressure from new Prime Minister

Shinzo Abe for a greater push to beat deflation and lift the
economy out of recession.

In a joint statement with the government, it affirmed a
well-flagged move to commit to the inflation target. Consumer price inflation
has reached 2% in only a handful of months since the late 1990s.

But aware that markets had already factored in the new price
goal and more asset buying and that merely meeting those expectations could
trigger a negative reaction, central bankers took steps that several analysts
thought would only come later.

"This is very good news. For once, the BoJ has been
more aggressive than the market expected," said Brian Redican, senior economist
at Macquarie in Sydney. "The government is clearly forcing the pace of
change, which is no bad thing."

The central bank said that from 2014 it would switch to an
open-ended approach of buying a certain amount of assets - ¥13 trillion - each
month without setting a deadline for completing the purchases.

The yen, which inched up ahead of the policy announcements,
fell immediately after the decision, though later crept up higher.

Several analysts pointed out, however, the BoJ could have
done even more and there will be expectations that it will follow through with
further steps mooted by politicians, economists and some central bank
policymakers.

More action expected

One such step would be to scrap the 0.1% floor for
short-term interest rates, while another would be for the central bank to buy
longer-duration bonds.

"There's still a lot of work to do, and still a lot of
room for improvement," said Tadashi Matsukawa, head of fixed income at
Pinebridge Investments in Tokyo.

Abe, who led his Liberal Democratic Party to a landslide
victory in a December 16 parliamentary election, made promises of aggressive
budget and monetary stimulus a centrepiece of his campaign.

His pledges to boost public spending and repeated calls for
more BoJ action helped reverse a long-term rise in the yen and set off a stock
market rally led by exporters and construction firms.

But many economists have warned the stimulus could give the
sluggish economy only a temporary jolt if the government fails to follow
through with politically more difficult economic reforms such as deregulating
its protected farming sector.

They also warn that the push to reflate the economy could
backfire if Abe's government fails to convince markets that it has a credible
plan to get Japan's ballooning debt back under control.

Seeking to address such concerns, the government said in the
joint statement it would draw up a growth strategy and pursue structural
reforms to help Japan escape deflation and pledged to maintain fiscal
discipline. Economics Minister Akira Amari attended the BoJ meeting to
represent the government's views.

The yen has lost 13% against the dollar in the past two
months to hit a two-and-a-half-year low on expectations of bolder central bank
action. Tokyo stocks have gained a fifth on the view the weaker yen will boost
the export earnings of the likes of Nissan and Canon.

The yen's declines, however, have drawn complaints from countries
like Russia and Germany, worried that it could set off destabilising currency
devaluations.

In a sobering reminder that Japan still faced an uphill
battle in pulling out of more than a decade of low-grade deflation, the BoJ's
updated economic forecasts showed core consumer prices inching down in the
current fiscal year and up only 0.9% in the fiscal year ending in March 2015.

"Headline says core inflation at only 0.9% in 2014 so
when will they meet their inflation target of 2%?" asked Joseph Capurso,
currency strategist at Commonwealth Bank of Australia in Sydney.

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